When people are poor, they rent studio apartments and eat 65-cent burgers.
Once they get a little money saved up, it's a house in the burbs and steak
on the grill.

Health insurers behave similarly. Four or five years ago many watched
sales and profits plunge, so they shed businesses and cut costs.

But in recent years, revenue and profit have grown, and insurers are
expanding again. Last fall, major health insurers started announcing the
first of what analysts call a string of upcoming mergers.

Size has a lot to do with it. The bigger you are, the lower your back-office
costs - and the better your ability to negotiate discounts.

"This is an industry where economies of scale are very important," said
UBS analyst William McKeever. "The key to success is to have the best discounts
with doctors and hospitals."

The latest deal was made public in late April, when Minnetonka, Minn.-based
UnitedHealth Group (UNH) announced plans to buy Oxford Health Plans (OHP)
of Trumbull, Conn.

That announcement followed United's February purchase of Mid-Atlantic
Medical. After the Oxford deal closes, United will boast 20.1 million members
and rank No. 2 in the industry.

The top spot is reserved for the company that forms when Indianapolis-based
Anthem (ATH) completes its merger with Thousand Oaks, Calif.-based WellPoint
Health Networks. (WLP)

Their $16.4 billion deal, expected to close midyear, will turn the joined
Blue Cross and Blue Shield companies into the country's largest health
insurer. The merged firm will be called WellPoint and have $27 billion
in assets and cover 26 million people in 13 states.

This leaves Aetna (AET) in third place with 13.3 million members and
Cigna in fourth with 10.2 million.

A March report from Merrill Lynch says large insurers will target regional
health plans such as Coventry Health Care, (CVH) First Health Group (FHCC)
and Health Net. (HNT)

Beyond the financial clout that comes with being bigger - large plans
can demand that doctors and hospitals accept lower prices in exchange for
their medical services - mergers also help health plans save money by eliminating
redundant data processing and corporate staff.

They also give companies national reach, meaning they're in a better
position to serve large corporations with employees scattered across the
U.S.

Glenn Melnick, senior economist at Rand Corp. and head of health care
finance at the University of Southern California, says there's another
reason big health plans are merging: They need to get their tech houses
in order.

"Cost reduction won't be nearly enough to justify (WellPoint and Anthem's)
$16 billion price tag," he said. "What they're betting on is that they'll
have almost 30 million subscribers and growing. That will let them invest
billions into a next-generation information system."

He says current information technology systems aren't set up to fully
serve patients, who are asked to make more decisions, pay more out-of-pocket
costs and choose their doctors and hospitals.

"Suppose your doctor says you need a hip replacement," Melnick said.
"The health plan of the future will offer you a Web site where you can
look up the 20 hospitals in your plan and look at their hip replacement
(success rates)."

The site will detail what your insurer will pay, your out-of-pocket
costs and your expected recovery time.

"It'll have all the information you now get when you're planning a vacation,"
Melnick said.

The systems won't come cheap. Melnick estimates each large insurer will
spend billions of dollars to install them.

Nonprofit Kaiser Permanente, the fifth-ranking health plan with 8.2
million members, already has spent more than $1 billion just trying to
organize clinical and patient information in California.

Big players will have advantages over their smaller peers when it comes
time to set up new information systems.

The reason: It costs just as much to build such systems for 20 million
members as it does for 30 million members.

Industry watchers expect more deals over the near term.

With the exception of Cigna - which is still working on improving internal
operations and systems - the others are ready to make acquisitions, says
Ken Abramowitz, a managing general partner at New Global Network, a private
equity investment firm in New York. He estimates that Cigna is two years
behind.

"In the average state, the Blue Cross plans, United, Aetna and Cigna
together control about 50% of the market," he said. "There's opportunity
for them to gain the other 50% by winning new members or acquiring them."